How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

The Trump effect: is this time different?

LevyInstituteAn interesting recent paper here from the Levy Economics Institute of Bard College on the prospects for the US economy in the coming years. The authors use their model, which was developed with the late post-Keynesian economist Wynne Godley (one of the few to have predicted the Great Recession), to take stock of the current situation and to discuss alternative future scenarios.

Nikiforos and Zezza argue that the US economy has performed relatively poorly since the Great Recession, and growth outcomes continue to disappoint. Although headline unemployment is relatively low, there remains substantial labour underutilization in the form of ‘marginally attached workers’ and involuntary part-time workers, which when added to the headline rate is known as the U6 measure. The latter is nearly double the headline rate, and helps to explain the continued weakness in wage growth.

The US economy faces three headwinds which continue to constrain growth: income inequality, fiscal conservatism, and the weak performance of net exports (exports minus imports). Continue reading

Austerity and Germany’s Social Democrats – via econoblog101

Many of my European friends ask me about Martin Schulz and the success of social-democrats at the polls. Since they are progressive, they hope for reforms in the eurozone to curb mass unemployment, stellar youth unemployment and social problems that exist in many crisis countries. I always had my doubts if Martin Schulz was the […]

via … and austerity for all! (Martin Schulz reloaded) — econoblog101

Neo-liberalism and the productivity problem

Margaret_Thatcher_(1983)

Margaret Thatcher is irrevocably associated with neo-liberal politics

What has neo-liberalism got to do with productivity? Since the financial crisis many countries in both the rich and emerging world have experienced slowing productivity growth. Productivity growth is what makes rising living standards possible. It enables workers to earn more while working the same hours. Alternatively, it can enable them to earn the same wage while working fewer hours and taking more leisure. Government policy, trade unions and corporate governance can have a strong influence on such outcomes.

The UK economy has seen a particularly dramatic productivity slowdown since the crisis, from annual growth in output per hour of 2.2% between 1996 and 2006, to an average of 0.2% between 2006 and 2016. This is an astonishing turnaround. Continue reading